By Daniel Ma

You might have noticed the boom of bike sharing in China. Dozens of similar companies have taken the industry by surprise, and they have been growing rapidly with large streams of cash pouring in over the last few months.

Do you really understand why investors are so crazy about this business model? What are the pros and cons behind it? As an insider in the startup world and one who understands the investment philosophy, let me walk you through what is catching on in the bike sharing business model.

Wonderful solution for the “last mile”

You are planning to go somewhere, and this place is just one or two miles away from your current location. It is too short to hail a taxi, but it is also too far to walk. What should you do?

This typical scenario is what we call the “last mile problem”. Imagine you are able to find a bicycle nearby which is easy to use at an affordable price – how amazing would that be.

Bike sharing was designed to solve this problem, and it has been proven to be easily accepted by most users. Ofo claimed to have two million users while Mobike said that they have about four million by the end of 2016. It is an incredible feat!

Efficient business model

Amongst the Chinese bike sharing providers, the most expensive manufacturing model is Mobike’s. It claims that it costs more than USD 400 to manufacture each bike. Assuming each bike is used for three hours each day, the revenue would be just around USD 1. This means that each bike will take 400 days for the manufacturing cost to break even.

mobike-Mobike.com

Considering that these bikes usually have a lifecycle of two years, bike sharing providers will surely not want to lose money on the hardware. Meanwhile, with millions of daily active users, these companies can gain reasonable revenue through advertisments and other financial services.

Break even on hardware and earn money on software. Does that sound familiar? This model was created by Xiaomi, one of the biggest smartphone manufacturers in China, and it has already been proven to be the most efficient business model for hardware business.

It’s not just about hardware

One fact you cannot miss is that these bike sharing startups are not only hardware companies, but they are also making money from getting online users.

If you want to use any of the shared bikes, you need to install their mobile apps first. Those apps can help you find the nearest bikes, lock and unlock bikes, and so on. On the other hand, they are gathering customers’ data and accumulating the number of users.

In addition, their bikes’ unique colors and designs that stand out on the streets are forms of free publicity that attract millions of users.This is the reason why bike sharing companies have extremely high valuations.

Area density matters

Lastly, we need to be aware that nothing is perfect, and the bike sharing business model also has its weakness.

The main problem is that it is more suitable for big cities. The economics behind it is to use less bikes to cover more users in densely populated areas.

Unless the physical location is suitable, users will not find a bike nearby easily. Imagine walking 500 meters to find a bike to travel a 1000 meter distance?

That would be ridiculous.

That is why all businesses have risks.

Correction: The original story quoted AppAnnie as a source for the number of downloads for ofo and Mobike apps on Android phones – it was incorrect. The information has since been updated above. 

(Top Photo from Pexels.com)